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European central bankers pledge to keep rates low

Pat McGrathUpdated
Fri 5 Jul 2013, 1:56 PM AEST

Two of the world's most powerful central bankers have taken the unprecedented step of signalling their plans for future interest rate decisions. Overnight, the Bank of England's Mark Carney and the head of the European Central Bank, Mario Draghi, indicated rates will remain at historic lows for some time. European markets surged ahead on the prospect of more cheap money, but there are warnings the announcement sets a potentially dangerous precedent.

Transcript

SCOTT BEVAN: Two of the world's most powerful central bankers have taken the unprecedented step of signalling their plans for future interest rate decisions.

Overnight, the Bank of England's Mark Carney and the head of the European Central Bank, Mario Draghi, indicated rates will remain at historic lows for some time.

The European markets surged ahead on the prospect of more cheap money but there are warnings the announcement sets a potentially dangerous precedent.

Here's our business reporter, Pat McGrath.

PAT MCGRATH: Never before has the head of the European Central Bank been so explicit about his governing council's plans for the official interest rate.

MARIO DRAGHI: The governing council expects the key so all interests, to remain the key ECB interest rates, to remain at present or lower levels for an extended period of time.

MARIO DRAGHI: Overall, euro area economic activity should stabilise and recover in the course of the year, albeit at subdued pace.

PAT MCGRATH: The ECB's announcement was accompanied by a similar declaration from the across the English Channel.

The Bank of England, under the chairmanship of its new governor Mark Carney, said in a statement that it plans to keep its official rate at just half of 1 per cent.

And it's vowed to maintain its 70 billion monetary stimulus.

Matt Sherwood from the investment firm Perpetual is surprised by the move.

MATT SHERWOOD: Pretty much it's an historic change and really sees them walking away from two decades of convention with central banks about never offering explicit guidance about future interest rate direction.

PAT MCGRATH: There's been renewed volatility in markets around the world since the US Federal Reserve chairman Ben Bernanke hinted in May that his central bank may be looking to unwind its money printing program.

Matt Sherwood believes Europe's two most powerful central bankers were left little choice but to make their own intentions clear.

MATT SHERWOOD: It probably really reflects the concerning state that the two gentlemen had about the outlook for the European and the UK economies.

On Wednesday, his joke during a speech about the length of time it took the RBA (Reserve Bank of Australia) to make this month's interest rate decision helped send the Australian dollar to its lowest level in almost three years.

But Monash University's Nigel Morkel-Kingsbury, who studies central bank structures, says there is room for greater transparency at the RBA.

NIGEL MORKEL-KINGSBURY: The New Zealand central bank is even more transparent - they even publish their forecasts, or the forecasts of where interest rates are likely to go.

PAT MCGRATH: What is the economic benefit of doing that?

NIGEL MORKEL-KINGSBURY: We're always making decisions based on the information set that we have. If our information is more fuller, we can make a better decision.

MATT SHERWOOD: You have to remember, the Reserve Bank was raising interest rates in 2008, and of course, that was the year f the global financial crisis, and if they had kept providing future guidance, saying yes, rates are going to go up and up and up - and of course then we run into terrible events like the collapse of Lehman Brothers - then all of a sudden they have to quickly reverse that expectation that they set in the market.